Microsoft agrees to buy aQuantive for $6 billion

Microsoft Corp.'s $6 billion acquisition of Seattle-based aQuantive Inc. would be the largest in its history -- an unprecedented step in its attempt to catch its online rivals and ensure its place in the Internet economy.

The agreement to buy the digital marketing and advertising firm, announced Friday, promises to significantly expand Microsoft's existing online ad initiatives and move the company into new areas of the market. The acquisition announcement itself didn't surprise analysts and investors -- but the blockbuster price tag did.

Under the deal, Microsoft will pay $66.50 for every aQuantive share. That's 85 percent more than the stock's closing price before Friday's announcement. But Microsoft wasn't alone in pursuing aQuantive, and it has been stung in similar situations in the past, coming up short in bidding wars for high-profile acquisitions.

"This was a competitive bid, and we're delighted that we won," said Kevin Johnson, president of Microsoft's Platforms and Services Division, in an interview after the announcement. He declined to name the other bidders.

		Dan DeLong / P-I
	"We're delighted that we won," Kevin Johnson, foreground, president of Microsoft's Platforms and Services Division, said of the company's successful bid to buy aQuantive. With Johnson is aQuantive CEO Brian McAndrews.

But all the big players appear hungry for deals. Microsoft's plan to buy aQuantive comes amid a wave of industry consolidation that includes Google buying online advertising company DoubleClick Inc., Yahoo Inc. buying online ad exchange Right Media Inc., and WPP Group PLC buying ad firm 24/7 Real Media Inc.

"When Google bought DoubleClick, which is the prize here in the industry, it made Microsoft look more and more behind, and I think they just had to do something," said Tim Bueneman, senior vice president at McAdams Wright Ragen in Seattle and a devoted aQuantive investor who speaks highly of the company.

Even so, Bueneman said he "was just totally shocked" at the price, adding that it seems to reflect "a little bit of desperation" on Microsoft's part.

Despite making massive investments in its Internet search and online advertising technologies, Microsoft remains a distant third to Google and Yahoo in both areas. Microsoft reported $1.5 billion in online advertising revenue in its fiscal 2006 -- about 10 percent of Google's annual advertising revenue.

Founded in Seattle in 1997, aQuantive comprises three main businesses: a Digital Marketing Services unit, including agency Avenue A/Razorfish, which develops online campaigns for advertisers; a Digital Marketing Technologies unit, which includes software for online advertising; and a Digital Performance Media group that finds and buys online advertising space for the company's clients.

Up to this point, Microsoft has been focusing on selling ad space on its own Windows Live and MSN sites, and in other areas, such as its video games. But the acquisition of aQuantive means that the company will be designing campaigns and placing ads for all sorts of advertisers on all sorts of sites.

"In general, it seems to open up the broader online advertising market opportunity for Microsoft, by giving them deeper exposure inside interactive agencies, media buyers, and it also extends Microsoft's reach onto other Web sites," said Derek Brown, an analyst who covers aQuantive at Cantor Fitzgerald.

"It's really a pretty significant move," agreed Matt Rosoff, an analyst at research firm Directions on Microsoft, pointing out that it plays into the company's long-standing efforts to move beyond its traditional PC and server software products. "To me, it means that they're serious about creating that third core business."

AQuantive has 2,600 employees, including 630 in Seattle. No layoffs are planned, and aQuantive will continue to operate from its downtown Seattle headquarters as part of Microsoft's online services business, the companies said.

The fact that the companies are both based in the Seattle region could help smooth the transition, analysts said. Microsoft is tight on space in Redmond, and Johnson said that shifting some employees to Seattle from Redmond is a possibility, as is expanding beyond the existing space that aQuantive has in Seattle.

"The fact is we need floor space, and aQuantive's got some floor space in Seattle, so that's a positive thing," Johnson said, adding that there are no specific plans.

AQuantive Chairman Nick Hanauer said the fact that both companies are in the Seattle area is "huge."

"I think it is going to make a tremendous difference in terms of the success because there is a lot of shared cultural DNA, and distance does matter," said Hanauer. "It matters that you can just meet for a beer and talk about shared problems."

At a news conference Friday morning outside the Bell Harbor International Conference Center in Seattle, Johnson and aQuantive Chief Executive Brian McAndrews shook hands before answering questions from reporters.

"We are really excited to, again, sort of take our company, aQuantive, which has been running really well on gasoline, and now put some rocket fuel into it," McAndrews said.

News of the acquisition sent aQuantive's shares soaring. They closed Friday at $63.79, an increase of more than 77 percent. Microsoft's shares dropped 15 cents to $30.83.

AQuantive reported 2006 profit of $54 million on sales of $442.2 million. Earlier this month, it reported an 87 percent increase in first-quarter profit, to $14.2 million. Microsoft's Online Services Business posted a $200 million loss in the same period.

Microsoft said the deal doesn't change its earnings forecast for the upcoming fiscal year. And with $28.2 billion in cash as of March 31, the company has plenty to fund the purchase, despite reducing its cash balance over the past few years.

The aQuantive deal "certainly makes Microsoft stronger online," said Charles Di Bona, an analyst at Sanford C. Bernstein & Co. "Is this the one thing that they needed to turn the tide? Probably not. But it's a step in the right direction."

Peter Christothoulou, chief strategy officer at Marchex, a Seattle online advertising company that works with aQuantive, said that Microsoft is acquiring some of the top management talent in online advertising.

"They really know the online space as well as anybody," he said.

Even so, some questioned whether Microsoft paid too much.

Chris Liddell, Microsoft's chief financial officer, defended the aQuantive acquisition when quizzed about the price in a conference call with analysts.

"In the case of aQuantive, we believe it is exactly the right company to buy, and hence we're willing to pay the value that we're talking about today," Liddell said. "We have been very selective in our acquisition approach, and waiting for what we consider to be the most strategically important acquisition."

The deal is expected to be completed in the first half of Microsoft's fiscal 2008, which starts July 1. It will require regulatory approval in the U.S. and in other countries.

Microsoft has called for regulators to closely scrutinize Google's DoubleClick acquisition for hurting competition in the market. However, Microsoft doesn't envision similar concerns with the aQuantive deal, Microsoft General Counsel Brad Smith said Friday, because it generally adds capabilities that Microsoft doesn't have.

"Acquisitions of complementary assets, such as the Microsoft-aQuantive deal, normally do not raise antitrust concerns," Smith said on the conference call.

Clark Kokich, who runs aQuantive's Avenue A/Razorfish unit, expressed excitement about joining forces with Microsoft.

"The opportunity for us is to simply have the global reach, technology and financial backing of Microsoft, so that we can keep executing on our plan," he said, "which so far is working very well."